This case presents a single somewhat simple issue which briefly stated is whether or not a District Court has the power to enter a net judgment in a plenary action brought by the trustees of a railroad in reorganization to collect pre-reorganization freight charges and in which action the defendant has counterclaimed for pre-reorganization loss or damage to freight when the court supervising the reorganization of the debtor railroad has not permitted to set off for any other payment of such claims for loss or damage.

The record in this case is also relevantly simple and consists almost entirely of a stipulation.

Very briefly, the Penn Central trustees whose property had entered reorganization in June of 1970, pursuant to a direction in the initial order in that reorganization to go out and collect the property of the debtor wherever they could find it, sued in the District Court for the Northern District of Illinois to collect some eighty-two hundred and some odd dollars in freight charges.

The Defendant Gold Seal Liquors filed an answer which was essentially a general denial but also filed a counterclaim for some nineteen thousand and some dollars in loss or damage to shipments all of which occurred prior to the reorganization.

There was thereafter a stipulation between the trustees and the Defendant Gold Seal.

Gold Seal admitted its liability on freight charges in some sixty-nine hundred and ninety-nine dollars and some odd cents and the trustees acknowledged liability on this pre-reorganization loss and damage claims in some eighteen thousand some odd dollars.

The trustees then moved for summary judgment and they asked the District Court to enter separate judgments in the respective amounts, one on behalf of the trustees for their $69.99 and one for Gold Seal for their $18,000.00.

The District Court indicated that it didn’t believe that it had been cited any authority which would justify the entry of separate judgments, but concluded that in any event it would be inequitable to enter a separate judgment so it entered a single net judgment.

The trustees thereafter appealed to the Seventh Circuit and the Seventh Circuit affirmed.

It thought the matter that was presented to it was one of judicial comity and went on to say that the matter of the adjudication of the claims in Illinois Court was a matter of law.

It said the satisfaction of the resulting judgment is subject to the equitable principles generally applicable in a court of bankruptcy and then directed that the resulting judgment be filed with the Reorganization Court for proof and allowance.

Justice Potter Stewart: That was a net judgment?

Mr. Paul R. Duke: You’re right, Your Honor, that’s the trouble.

Once it said resulting judgment to say that the satisfaction of the resulting judgment is for the Reorganization Court to me begs the question because by affirming the net judgment they’d already satisfied seven-eighteenths of Gold Seal’s claim.

I think it can best be seen if Gold Seal had sued the trustees for $19,000.00 in pre-reorganization loss and damage claims, the trustees defended and succeeded in showing it was only $18,000.00, unlike anyone would contend that the Illinois District Court could take $7,000.00 of the trustees property which it could lay hands on in Chicago apply it in partial payment of that judgment and then they'll say as to the remainder you have to file that in Philadelphia and collect your $11,000.00.

We submit that that was the basic error.

We believe it’s probably clear that Section 77 of the Bankruptcy Act confers exclusive jurisdiction of the Reorganization Court for the disposition of the property which becomes into its possession and also exclusive jurisdiction over the payment of pre-reorganization claims.

Justice William H. Rehnquist: What do you concede to be property of the debtor that was here involved?

Mr. Paul R. Duke: This shows as an action, Your Honor, for freight charges which came into their possession on June 21, 1970.

Now, admittedly they were not liquidated, at that time.

We say that plenary action in the Illinois District Court liquidated those and admitted amount of some almost 24 twenty-fourth cents to $7,000.00.

Justice William H. Rehnquist: Oh!

Do you disagree with Judge Friendly’s treatment as the concept of property and in Lehigh and Hudson case and Judge Hand’s language in the Roman case?

Mr. Paul R. Duke: Well, if Your Honor please in re Roman it was a straight bankruptcy case where there is no right of set off and I think Judge Friendly’s discussion in Lehigh and Hudson River distinguished it.

But you see in Lehigh and Hudson River, Your Honor, the set off of was accomplished prior to the entry of the order putting Lehigh and Hudson River in reorganization.

In other words, in that case they went in on April, I forget 16 --

Justice William H. Rehnquist: But what’s they’re talking about there is that what is the property of the bankrupt?

Mr. Paul R. Duke: That’s right.

Justice William H. Rehnquist: And I would think the -- whether when the particular amount occurred wouldn’t have too much role than so far as there definition is concerned?

Mr. Paul R. Duke: Well, I think it will not Your Honor to the extent that it goes to the issue of whether or not, if you have effectuated to set off to prior to the entry of the order boring set offs, you may have raised to substantial adverse claim to the property and I say that’s the essential holding of Lehigh and Hudson River.

Justice William H. Rehnquist: But that deals with the summary of jurisdiction in the bankruptcy court rather than a plenary action?

Mr. Paul R. Duke: That’s right.

And here the plenary action sought to enforce these shows as an action, i.e. the right to collect for these freight charges which came into the proper -- it came into the possession of the debtor and to the exclusive jurisdiction of Reorganization Court when the trustees -- when the Penn-Central entered reorganization.

Justice William H. Rehnquist: Well, do you think the bankruptcy court has the authority to tell the trustees that you can go into any District Court in the country and sue and I am going to immunize you against the normal consequences of litigation in that Court?

Mr. Paul R. Duke: No, I think -- well, the normal consequences of litigation Your Honor, I say, do not mean under 77 that the trustees have to risk their property, risk that a Illinios District Court will order the payment of these claims by netting out this judgment simply because they go to collect their property.

Justice Harry A. Blackmun: Mr. Duke the damage claims under the transportation charges all arose out of different shipment --

Mr. Paul R. Duke: That’s correct, Your Honor.

Justice Harry A. Blackmun: Would it make any difference if there was one damage claim and one transportation charge, and was out of the same shipper?

Mr. Paul R. Duke: Your Honor, that’s a tougher question obviously.

In Lyn Bell which is the original authority for in effect having counterclaims where damage is litigated in freight charges actions is not clear.

It speaks in terms of set off at one point and in other terms of counterclaim.

But the law appears to be clear that a counterclaim for loss and damage or a claim for loss and damage, let’s not characterize what it is, is not a defense to the trustee’s action for freight charges.

It is a separate independent claim which for reasons of judicial economy and efficiency can be litigated and prosecuted the judgment in the same action.

Now, it’s perfectly clear that normally, when you have these two separate judgments which liquidate these two independent claims, it would be foolish not to net them out and enter a judgment.

We say the intervention of reorganization and the exclusive jurisdiction which Section 77 (a) vests in a Reorganization Court, for the payment of claims and over property of the debtor?

One of them is this as I take it; that if the trustee have never sue and the other railroad simply wanted to establish a claim for damages, would it have had to go to the Reorganization Court or was this a liquidated claim that was fileable as a claim?

Mr. Paul R. Duke: No, it was not liquidated, it was --

Justice Byron R. White: So, it would have had to sue just like it did here, the trustee in an appropriate court?

Mr. Paul R. Duke: That’s right, Your Honor.

Justice Byron R. White: But once, it was establish, the only way that it collect its claim would be to file it.

Otherwise, it would be a preference to that creditor.

Mr. Paul R. Duke: That’s correct, Your Honor.

Justice Byron R. White: And that’s what underlies the rule against set offs, but in ordinary bankruptcy, Section 68 expressed that permits set offs?

Mr. Paul R. Duke: That’s correct Your Honor.

Justice Potter Stewart: But in reorganization as I understand it, it’s been held that that 68 is not necessarily controlling?

Mr. Paul R. Duke: And it is a matter for the discretion of the court supervising --

Justice Byron R. White: And wherever set off is allowed, it does effect to preference?

Mr. Paul R. Duke: That’s correct, Your Honor.

Justice Byron R. White: Yeah but the other point is then not only the collect of the -- whether -- well, you’ve answered my one question as to whether the other court had jurisdiction to give judgment to the claimant and you say it did?

Mr. Paul R. Duke: We did not contest the jurisdiction to litigate the claims on the lower court.

Justice Byron R. White: So, it’s really the remaining point as to whether that claim may be satisfied out of a claim of the trustee?

Mr. Paul R. Duke: That’s right, Your Honor.

And Your Honors already indicate our second point which is that through the procedure followed by the district court here.

This one loss and damage claimant has gotten payment on his claim as contrasted with all other loss and damage claims, it's including loss and damage claimants who are brought in before Judge Fullam --

Justice William H. Rehnquist: Yet there were concededly happened in straight bankruptcy?

Mr. Paul R. Duke: Oh, no question about it Your Honor.

But Section 68 gives an automatic right to set off in straight bankruptcy but in a reorganization --

Justice William H. Rehnquist: Well, your policy against preferences is just as strong in straight bankruptcy as it in reorganizations, isn’t it?

Here it’s a court of equity where it’s been held that it’s a matter of discretion through Reorganization Court and I should make clear that Reorganization Court in denying set off of up to now for this type of claimant has not done so forever and a day.

He said, “It’s without prejudice to your claiming priority when we get to the proof and allowance to claims.”

I would finally suggest to Your Honors that there is another case quite similar to this one which arose out of the Eastern District of Michigan where we have appended that opinion has been addendum to our brief.

We think it provides excellent evidence of the proper method for handling such problems.

In that matter of suit for freight charges counterclaims for damages, admittedly the Court could not enter judgment on the counterclaim because it was on a motion for summary judgment and there were questions of law and fact raised, but that court indicated what enters judgment for the trustees on their claim for freight charges, but the exclusive jurisdiction the Reorganization Court prevented it from satisfying any judgment that it ultimately entered on the counterclaim for loss of damage out of the property that arose of the trustees including the proceeds of this judgment.

Justice Harry A. Blackmun: How is it -- the decision been appealed at all?

Mr. Paul R. Duke: Your Honor, as far as I know, it has not yet although there have been indications that it will be.

I like to reserve additional time --

Justice Lewis F. Powell: May I ask you a question first?

Mr. Paul R. Duke: Yes, Your Honor.

Justice Byron R. White: What is the relevance, if any of Sections 31 and 67 the Interstate Commerce Act?

The relevancy of those Sections as discussed in some of the opinions we cite was whether or not a shipper could have effectuated the extinguishment of the trustees claims for freight charges with a non-judicial netting of freight charges against loss and damage claim against freight charge.

The Third Circuit in the -- what we have described as the shipper set off case in this reorganization, affirmed an opinion by a judgment by Judge Fullam that such a netting out could not occur.

Justice Lewis F. Powell: That’s a non-judicial netting?

Mr. Paul R. Duke: Because the requirement of Section 67 Your Honor that freight charges be paid in cash and that all shippers pay in the same form prevented any -- and the general policy of the Act against secret rebates and secret arrangements prevented the shipper from -- any railroad from agreeing off the record or outside the confines of a judicial proceeding that they would net out their freight charges in loss and damage claims.

Justice Lewis F. Powell: But this case is different because you don’t have a netting out but the party who has a claim against the railroad?

Mr. Paul R. Duke: That’s right Your Honor, and it did not occur pre-reorganization.

What we have here is litigation which established our right to $7,000.00 that’s clear.

Litigation which liquidated his claims at $18,000.00 and then the Court took the one claim, that it did them separately and so it entered net judgment for eleven.

Thank you, Your Honor.

Chief Justice Warren E. Burger: Mr. Herst.

Argument of Theodore J. Herst

Mr. Theodore J. Herst: Mr. Chief Justice, and may it please the Court.

I think that the basic question that runs through the entire thread of this case is exactly how much power Judge Fullam has, sitting in Philadelphia by his orders to control the disposition of litigation in Illinois and actually by examining the text of those orders what he actually intended to do.

Coming first to the most important point the matter of jurisdiction, there was no question that the court of bankruptcy under Section 77 (a) has exclusive jurisdiction of all of the debtor’s property at the time of the filling of the petition, but we contend that this shows an action was not such property.

We say there was no actual possession.

There was no constructive possession.

There was in fact to substantial adverse claim because this railroad owed this company almost two-and-a-half times the amount they claimed and it being an adverse claim, could be subject to disposition only by plenary jurisdiction, by a plenary suit which the trustees did commence.

We state further that at this time there was no jurisdiction, no summary jurisdiction at any time over Gold Seal Liquors.

We were outside the jurisdiction.

We didn’t even file a claim the trustees recorded from the books that they have the amount that was owed us and advice us by notice that a claim was noted in the amount and in an approximate amount as to what we had.

Justice Potter Stewart: Why didn’t you file a claim in the Reorganization Court?

Mr. Theodore J. Herst: Well, we didn’t file a claim in the reorganization, Your Honor because we saw the lawsuit coming and because frankly, we were concerned as to what the effect of participating in Philadelphia would be.

Justice Byron R. White: Do you think it would -- that they just note the claim or was it --

Mr. Theodore J. Herst: Your Honor, what they did is they sent a notice if we look at the genesis of the lawsuit, the suit was filed in the end of 1970.

Under date of February 1, 1971 to which was appended a statement of the account as of March 6, 1971, a document which was received by my client at the end of June 1971.

I got the following day, they said, “This notice does not constitute an admission of the amounts of forth above or any other amount is due and owing to you by the debtor.

It is merely intended to notify you that the records of the debtor indicate that the attached described claims have been heretofore presented by you to the debtor and to advice you that the formal proof of claim need not be filed by you in this reorganization proceeding for these claims.”

Justice Byron R. White: So, it was a -- so in effect it was -- it really was an admitted liquidated amount?

Mr. Theodore J. Herst: No, it was not Your Honor.

Because we filed --

Justice Byron R. White: My question is, do you think that that was subject to the filing of the proof of claim without a judgment?

That’s what I asked your colleague --

Mr. Theodore J. Herst: I see what you mean Mr. Justice White.

Justice Byron R. White: I asked your colleague whether or not this was fileable as a claim in the Bankruptcy Court without further liquidation.

Now, I had always thought that if you got a note -- if a creditor got a notice like that from the trustee, he was invited to file a claim and then it was admitted in that amount.

Mr. Theodore J. Herst: In that amount.

Justice Byron R. White: But if that isn’t true then it wasn’t liquidated?

Mr. Theodore J. Herst: That is correct.

That is correct and the amount was also different.

The amount shown on this claim is different than the amount we originally claimed and the amount that counsel and I subsequently thrashed out which was embodied in the stipulation as the actual amount.

Justice Potter Stewart: And that that you just had in your hand and read to us was notice that you, your client got --

Mr. Theodore J. Herst: Yes.

Justice Potter Stewart: -- from the debtor and reorganization?

Mr. Theodore J. Herst: From the trustees.

Justice Potter Stewart: Yes, from the trustees, saying -- it went to say that we acknowledge the existence of a --

Mr. Theodore J. Herst: No, they say it does not constitute an admission, but they simply state to notify us that the attached described claims and it’s actually their statement of account have been presented by us, have been presented by you to the debtor because we’ve made the claims under the --

Mr. Theodore J. Herst: Prior to reorganization under the Interstate Commerce Act a claim on the Bill of Lading, Mr. Justice White.

Justice Potter Stewart: I see.

I see.

Justice Byron R. White: But then they see you’ll need not file a claim.

Now what that means to me is that they will take account of that claim in for preparation of plan of reorganization?

Mr. Theodore J. Herst: Yes, I would suggest --

Justice Byron R. White: Without of filing of the claim.

That’s an admitted claim that would be taken care of in the plan, that’s the way I look at --

Mr. Theodore J. Herst: In that amount, I suppose that is the only way you could regard it.

Now, but secondly --

Justice Potter Stewart: But it’s not liquidated and I mean the amount is not agreed upon or was not at that time?

Mr. Theodore J. Herst: It was not agreed.

Justice Byron R. White: Well, I take it, if that’s all you wanted to claim; you would not need the file claim.

Mr. Theodore J. Herst: I suppose if we would walk away Mr. Justice Stewart, I mean there are a lot of ifs Mr. Justice White, in response to Mr. Justice Stewart’s question.

If we wanted -- if we assumed that this was going to be a solvent situation, if we assume that we sooner or later might get something if we were satisfied with the approximate figure all other things being considered I assume we could walk away and do nothing and in the ordinary course just watch it.

Justice Potter Stewart: Alright, thank you.

Mr. Theodore J. Herst: Secondly, we believe continuing --

Chief Justice Warren E. Burger: When will you have to take your first step?

Mr. Theodore J. Herst: Sir?

Chief Justice Warren E. Burger: When will you have to take your first step, with respect to your claim?

Justice Byron R. White: You would not.

If you are satisfied with that amount, you would not have to take any?

Mr. Theodore J. Herst: That is correct.

And in this particular case Mr. Chief Justice, we never even thought of the taking the first step because we were being sued.

By the time we got this notice we were in the District Court in Illinois.

We had reached the pleading stage.

We were litigating so, we never would have gone into --

Chief Justice Warren E. Burger: So your first would be after that lawsuit has begun against you?

Mr. Theodore J. Herst: Right, whatever the results would be of the lawsuit would in effect be our claim and therefore our claim in effect by the lawsuit has been reduced to $11,000.00.

Secondly, I just think that this is unwarranted extension of attempted summary jurisdiction of the Reorganization Court but I don’t think the Reorganization Court intended so do.

There were two orders which we would have before us.

The first order to examine is Order Number 1 entered by Judge Kraft in June of 1970.

Justice William H. Rehnquist: Where is it in the appendix?

Mr. Theodore J. Herst: Your Honor, that order is found in the appendix at page A22 and following.

That order is what might be called a typical stock order if there’ll be such because it’s the usual order that has been entered in railroad reorganization cases and the paragraphs conform to the statutory language.

The key paragraphs for this purpose would be found at page 831 paragraphs 9 and 10.

These are found in most reorganization cases.

The first one to maintain the status quo is an injunction against interfering with a property of the debtor by garnishment, by levying, by interfering with liens and in our opinion against voluntary set offs because all of the cases urged by the trustees in the courts below concerning this question involved voluntary set offs, actions of self-help, some in aggregative circumstances.

In the Susquehanna case the Court noted that what had happened was that the bank by appropriating deposit balances had seized the operating cash to the railroad, equitable principles again.

Justice Cardozo’s rule in Lowden whether or not 68 should apply.

Obviously, in Susquehanna from the facts, it shouldn’t have applied and didn’t.

Justice William H. Rehnquist: But Lowden itself was that kind of a case?

Mr. Theodore J. Herst: Exactly, Lowden was a loose case.

In effect three questions were asked and Justice Cardozo said the first two are general and then explaining why they were general, he said, that you would have to have a very flexible rule.

Justice William H. Rehnquist: And there the bank in Minnesota had on its own initiative set off against the --

Mr. Theodore J. Herst: Yes, Your Honor.

And in Order 571, the Second Order that I would allude to entered in the summer of 1972 by Judge Fullam.

These involved shippers doing things by themselves setting off their own claims or alleging the existence of prior contractual arrangements with a debtor which would allow them to set off unilaterally.

There was no instance in that case of judicial action and I don’t think that Judge Fullam should be accused any, not that he is, but even considered to have intended that because in his Order 571 which is found at page 1 (a) of our blue covered brief, he extends his orders to all persons, firms and corporations served with a copy of the petition and we were never served, and he prohibits them from setting off or attempting to set off obligations.

We humbly suggest and submit that the litigation under the Federal Rules of Civil Procedure of a compulsory counterclaim and a plenary suit is not the type of thing that Judge Fullam was talking about in Order 571.

If we want to find out what Congress actually intended in the legislation, I frankly have had not too much success in looking over the reports of the committee on the judiciary shared by Representative Summers on the subcommittee on bankruptcy, headed by Mr. Walter Chandler about the time that Section 77 was amended in 1935 and subsequent.

We find much material on the modification of security interests, the amount of consent necessary to implement a plan, the need for railroad reorganization legislation to supplant the vices of equity receiverships, but nothing on this one question, but we do see one interesting thing, one indication of congressional intent.

We find first in Section 77 (l), sub-paragraph (l) of Section 77, the statement of the courts in reorganization of all the powers of District Courts sitting in bankruptcy.

The creditor’s rights are the same.

The court’s powers are the same and secondly in Section 77 (j), we find the proviso so to the effect that the courts are precluded from enjoining actions arising out of the operation of the railroads.

This proviso was reflected on a typical order in the single appendix at page 831, lines 18 to 21 of paragraph 9, down to near the bottom.

The Court reflects the statutory mandate which has provided it suits or claims for damages caused by the operation of trains, etcetera may be prosecuted the judgment at state.

And the Michigan Court recognized that to some extent although I don’t know what the value of it is, if you allow litigation of a counterclaim and you do not give effect to it in a usual manner.

There is no indication we submit in the Act of Congress of any intent to treat a counterclaim in this situation, otherwise then as a usual regular and typical counterclaim and we don’t think that the bar against the set off is a bar against litigation of this sort.

Now, from a policy point of view I suppose we are concerned about discrimination, discriminating against various classes of creditors.

But I think, Your Honors, that discrimination is the root of the judicial process because as jurists and as lawyers, we discriminate when we try to separate the relevant from the irrelevant facts in every situation and I think when we look at the situation in this particular case when we see the congressional intent in Section 77 (j), I don’t think that the result is an outrageous result.

I think that the courts below did substantial justice in this case because we were not typical creditors.

We were not customers of this railroad profiting by our business dealings with them.

We were the patrons of this railroad.

My client along with many, many others made this railroad run by giving it business and the more business we gave that up to the end, the more we were injured.

And I think basically that in the suit -- that the courts below did the proper thing.

I checked myself because I was concerned keeping in mind the Lowden record, the records of the courts of the principle center in the Seventh Circuit, those in Illinois, in Cook County, Illinois and I found the total of only three cases where there were counterclaims filed.

None particularly pleaded in detail, one in the state court, two in the federal court of which one is being removed.

There is no plethora of cases that would cause a problem to these trustees in the administration of the railroad.

It isn’t the existence of cases like this involving a little company that have brought the railroad to the past that it is right now where it may not even be reorganizable, but I think as a matter of law that the decisions are correct.

I think that the decisions of prior to courts sustain our position and a reading of the orders themselves would indicate that they were not intended to have the fact urged by counsel in that.

Chief Justice Warren E. Burger: Thank you Mr. Herst.

Do you have anything further Mr. Duke?

Rebuttal of Paul R. Duke

Mr. Paul R. Duke: One or two things Your Honor, and of course a number of suits is not of record.

We find it difficult to understand to check Mr. Herst made cause there are more than three.

There are at least 20 or 25 and in Chicago alone counterclaims pleaded amount to about $850,000.00 that does not include other places in the Seventh Circuit.

What is of record is that in the reorganization proceeding is a part of the stipulation.

It is agreed or in the affidavit in support of the motion that at the time of that motion there were some 9600 claimants, separate claimants with loss and damage claims in this reorganization who had filed loss and damage claims in an amount of approximately $29,600,000.00.

Justice Potter Stewart: Not even filed in the Reorganization Court?

Mr. Paul R. Duke: Your Honor, the procedure to which Mr. Herst, the notice which he received was a notice prescribed by Judge Fullam pursuant to Order 164.

This is a big reorganization and to try to get everybody to file.

So, what they did, what Mr. Herst got and that’s referred to in the stipulation also, was a notice saying, “Look, here’s what we got on file for you.

We got about $17,000.00 worth of loss and damage claims we’ve have already proofs.

We have got another couple of thousands under investigation.

If you don’t agree with that, you file a proof of claim right in we’ll give you the papers you file the proof of claim.

But unlike you --”

Justice William H. Rehnquist: But you get them account sometimes when he is auditing in your potential claimant, you just want to verify really the --

Mr. Paul R. Duke: That’s right.

But it is unusual Mr. Justice Rehnquist in this extent.

We indicated to him that you’ve got a couple of thousand, we haven’t finished investigating yet.

We may allow those, we might not allow them we’ll notify you when we get finished.

Of course, when we finished and notify them if we disallowed then you would then have an opportunity.

Justice Byron R. White: But you also have said if you don’t object to this amount we need to file a claim as far as bankruptcy for amendment you wouldn’t take that amount into consideration conforming?

Mr. Paul R. Duke: The amount that we have approved, Your Honor.

We hadn’t allowed it.

It begins by saying we don’t admit these amounts, the total amounts but here is the way it breaks down.

Justice Byron R. White: You don’t have to break that time making explain, if you didn’t to provide after having said that?

Mr. Paul R. Duke: Oh, We have to.

If we ever get to him.

I mean, if we ever get to unsecured creditor, sure allow.

As to $7,000.00, the result of the entry the net judgment is he’s gotten paid seven-eighteenth to his claim.